Explosion of public spending poses a new threat

17 May 2016

"The removal of crisis measures poses a new threat to public finances", warns the IMF. We might be put to a real test with the rise in interest rates as this brings the danger of state expenditure on interest increasing by EUR 300 million a year.

The public sector's irrational appetites for wages

On Monday, the International Monetary Fund warned that Slovenia is facing an avalanche of higher wages in the public sector. Thus, state expenditure is expected to increase by 2.7% this year and by 3.5% next year, eliminating all the saving efforts from the period from 2011 to 2014. As estimated by CCIS Analitics, the public sector wage bill will increase by as much as 5%, which is at least twice as much as in the private sector.

More on wages, less on infrastructure

The rise in public sector wages reduces the funds available for the regular maintenance of the public infrastructure, resulting in costs mainly incurred by the private sector and future higher costs for the renovation of the damaged infrastructure. Government officials thus work mainly to secure extra resources to finance investments instead of obtaining funds by reducing the public sector labour unions' appetites for wages.

No increase in productivity, no wage growth

The wage growth in the service sector, which includes the majority of the public sector, is problematic as it should lag behind the wage growth in the private, market sector. Another debatable issue is the absence of objective productivity measurements in the service sector, which creates a gap between the wage developments and the work done. Last year, the real wage growth in the public sector was 1.7%, making the growth rate significantly faster compared to that in the private sector (1%). The discrepancy continued to increase in the first two months of this year when wages in the public sector grew by 3.4%, and only by 2.6% in the private sector. Furthermore, the average gross wage in the public sector was higher by EUR 380 compared to the private sector.

Price decrease (deflation) results in higher purchasing power with the same earnings

The price decrease that we are still experiencing increases the real disposable income, even with no changes in wages. Last year, prices decreased by 0.5%. In March, the inter-annual (March 2016/March 2015) decline amounted to almost 1%. This results in a higher purchasing power, even if there are no changes in wages.

Higher deficit estimates than expected

In its report, the IMF revealed a few other important data concerning public finances. Last year's public finance deficit totalled 2.9%, which was more than initially foreseen in the first estimate (2.2%). However, it must be pointed out that using the cash flow methodology, the deficit was even higher, i.e. 3.3%.

 

Samo Hribar Milič, CCIS General Manager: "As members of the International Monetary Fund, we should face the truth and finally admit: the public sector's appetites for wages impair public finances and prevent labour costs from being cut for more employees. It is time for us as the tax payers to raise our voices and say no to the inexorable rise in public spending!"